Safe, Simple… but Not Always Risk-Free
Our asset class guide – to Cash. When people think about investing, they usually picture shares, property or superannuation. Yet one of the most widely held investments is also the simplest: cash. Whilst sometimes difficult to accumulate, Cash is safe, simple but not always risk free.
Cash includes bank savings accounts, high-interest online accounts, term deposits and, in its most basic form, physical currency. It is often described as the safest asset class – and in many respects, that is true. However, like every investment, cash has both strengths and weaknesses. Understanding these helps ensure it is used appropriately within your overall financial strategy.
What Is Cash as an Investment?
Cash investments generate returns entirely through interest. Unlike shares or property, they do not increase in value over time. There is no capital growth – only income.
Because the value of cash does not fluctuate daily, it is considered a defensive asset class. In a modern, developed economy you do not wake up to discover your savings account has fallen 15% overnight, which can certainly occur in share markets.
The key characteristics of cash include:
- Low volatility
- High liquidity (quick access to funds)
- Capital stability
- Returns derived from interest only
For short-term needs, these features are extremely valuable.
The Benefits of Holding Cash
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Security and Stability Cash is the most stable asset class available. Its face value does not move with markets, property prices or economic headlines. This stability provides peace of mind, particularly during periods of market uncertainty.
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Liquidity and Flexibility Cash can be accessed quickly, making it well suited to:
- emergency expenses
- upcoming purchases
- temporarily holding funds while investment decisions are made.
Financial planners commonly recommend maintaining several months of living expenses in accessible cash as an emergency reserve. The appropriate level will vary depending on your personal circumstances and risk tolerance.
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Protection During Market Volatility Cash acts as a stabiliser within an investment portfolio. During market downturns, investors with sufficient cash are not forced to sell growth assets at depressed prices. Instead, they can wait for markets to recover – or use available cash to take advantage of opportunities.
This is often referred to as having “dry powder”.
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A Useful Portfolio Tool Cash also plays an important practical role in portfolio management. It can be used to:
- fund pension payments in retirement
- support portfolio rebalancing
- facilitate dollar-cost averaging into markets
In this way, cash is not merely a parking place for money – it is a strategic component of a well-constructed investment portfolio.
The Pitfalls of Cash
While cash feels safe, it carries risks that are often overlooked.
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Inflation Risk — The Silent Erosion Inflation reduces purchasing power over time. If inflation averages 3% and your cash investment earns 2%, your real wealth is effectively declining. This impact is most pronounced with physical cash, which earns no interest at all.
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Tax Reduces Returns Interest income is generally taxed at your marginal tax rate. After tax, the effective return on cash may be significantly lower than the headline rate – and often below inflation.
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Lowest Long-Term Returns Historically, cash delivers the lowest long-term returns of all major asset classes. Shares and property have the capacity to grow over time, whereas cash grows only through interest and additional contributions. Holding excessive cash can therefore create a substantial opportunity cost, particularly for long-term objectives such as retirement funding.
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The Market-Timing Trap Many investors hold large cash balances while waiting for the “right time” to invest. Unfortunately, markets often rise unexpectedly, and time spent sitting in cash can result in missed growth opportunities.
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Reinvestment Risk Term deposits eventually mature. If interest rates fall, reinvesting those funds may result in lower income going forward.
Why People Hold Too Much Cash
Excess cash balances often build up unintentionally. Common reasons include:
- fear of market volatility
- limited understanding of investment options
- treating savings accounts as a permanent solution
- failing to view superannuation and other assets as part of total wealth
Savings accounts feel comfortable – but comfort does not always equate to an optimal financial strategy.
When Cash Is Most Appropriate
Cash works best when used tactically rather than as a long-term investment.
It is most appropriate for:
- emergency funds
- short-term spending needs
- income buffers for retirees
- reducing overall portfolio volatility
It is far less effective as a long-term wealth-building tool.
The Bottom Line
Cash is essential – but it is not a growth asset.
Used appropriately, it provides stability, flexibility and financial security. Used excessively, it can quietly erode wealth through inflation, tax and missed investment opportunities.
A well-designed financial plan does not avoid cash. Instead, it allocates the right amount of cash alongside growth assets such as shares, property and superannuation.
In investing, safety matters – but so does progress. The objective is not to eliminate risk entirely, but to balance stability today with financial security tomorrow.
Cash — An Important Element in the Planning Process
The advisers at Continuum Financial Planners have access to a wide range of cash and cash-style investment options, including high-interest savings solutions, term deposits and professionally managed cash investments.
These options can be used strategically – alongside growth assets – to align with your financial goals, objectives and personal risk profile.
Our team is available to work with you to develop and implement a clear, structured strategy to manage your financial affairs both now and into the future.
To make an appointment with one of our advisers:
- phone our office on (07) 3421 3456, or
- use our linked Book a Meeting facility at a time that suits you.
(This article was first posted by us in February 2026.)